The Farm CPA

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Three Years to Reinvest Condemned Farmland!

Sep 19, 2011

A reader asked the following question:

"I have a new state highway coming through one end of one farm. How is the money received taxed? Do I have any options for reinvestment without paying tax?"

Whenever farmland is condemned (or threatened to be condemned) for a new road or other use, the tax laws are very generous about allowing taxpayers to reinvest the proceeds from the condemnation in other farmland.

The taxpayer has three full tax-years after the year of the condemnation to reinvest the proceeds in other farmland. However, the taxpayer is allowed, if he so desires, to reinvest his proceeds in other real estate of "like kind." This definition is much broader than the normal similar-use requirement for other types of involuntary conversions such as a fire, etc., which would allow only two years to reinvest the proceeds into similar-use property. This means that the farmer in this case could reinvest the funds in a duplex in town or most any other type of real estate. He is not restricted to reinvesting in farmland.

Therefore, the answer for this reader is that if the condemnation occurs in 2011, he will have until Dec. 31, 2014, to reinvest the proceeds into other real estate. This period may be shortened if there was an ongoing threat of condemnation that started before 2011. In either case, the reader must review this with his tax adviser to make sure the transaction is reported correctly and the gain deferred properly.